Introduction to Blockchain: The Trust Machine
An interesting story to turn to when initially familiarising oneself with cryptocurrencies and
blockchain technology is that of William Henry Furness III, an American anthropologist who
travelled to a miniscule island in the Pacific Ocean called Yap (‘The Forbidden Island’) in
1903. On this secluded island is a monetary system like no other on earth. Their culture thrives
on exchanging the world’s heaviest and physically largest form of currency, the “rai” or “fei”,
which is essentially chunks of limestone quarried in Palau some 400 kilometres away and rafted
over to Yap. The difficulty of importing these stones as well as the currency’s inherent scarcity
contribute to its capacity to maintain value within the island’s economy. Perhaps the most
remarkable feat of Fei is that the stone doesn’t even have to be moved in order for someone to
spend it. Rather, the ownership of each stone is logged in Yap’s collective accounting ledger:
the memory of its residents. The extraordinary nature of Yap’s financial system has intrigued
economists such as Milton Friedman for decades, comparing it to the gold standard, citing that
as long as people have faith in the value of something, anything can be the trusted and
transacted monetary device. Philosophically, community consensus of who owns the Fei is the
true ‘money’, rather than the physical stone itself.
The global financial crisis in 2008 was an inflection point in regard to whether governments
and central banks should really be trusted to regulate our economy. Amidst financial
catastrophe, the pseudonymous individual(s) known as Satoshi Nakamoto distributed their
whitepaper called “Bitcoin: A Peer-to-Peer Electronic Cash System”. A prominent theme in
the paper is as follows: “The root problem with conventional currency is all the trust that’s
required to make it work. The central bank must be trusted not to debase the currency, but the
history of fiat currencies is full of breaches of that trust”. In a way, Bitcoin is a duplicate of
Yap’s stone technology. When Bitcoin is sent from one address to another, there is no physical
exchange of ownership over the digital tokens. Equally, when a 4-ton Fei stone is used to pay
for a wedding, the stone does not move – just its ownership. In the island, trust on this level
works because the community is tightly-knit, however, who’s to say the same singular Bitcoin
can’t be sent to multiple people in a copy-and-paste fashion? That comes down to Satoshi’s
innovative ‘blockchain’.
The Bitcoin blockchain is the pioneer of blockchains. The blockchain is an immutable database
of ‘blocks’ linked together, where each block houses a collection of transactions from a
recorded period. Once a block is full, a new one is added to the chain, hence, ‘blockchain’.
Blocks cannot be amended, only appended, meaning that every confirmed transaction is final
and recent transactions are simply added on once verified by nodes on the network. Bitcoin is
an opensource public ledger where people can transfer value among Bitcoin wallets. These
transfers are proven mathematically by ‘miners’ which are computers optimised to confirm
pending transactions within the distributed consensus system. Miners are rewarded with either
newly minted coins accompanying new validated blocks or transaction fees from transactions
in the block for their computational hashing power (verifying transactions), but only if they’re
the first to discover the solution to the complex, cryptographic hashing puzzle.
With all considered, it is commonly understood that blockchains are ‘trustless’ ‘confidence
machines’ that do not require the presence of a financial intermediary (banks, PayPal) to certify
the flow of transactions. Rather, nodes perform complex calculations in a competitive race to
verify transactions and get compensated for it, followed by a consensus mechanism that ensures
validators’ calculations are accurate and honest before the block is substantiated and added to
the blockchain.